Get Wise to Your Advisor: How to Reach Your Investment Goals Without Getting Ripped Off

Preface

As I write these words, a battle is playing out in Washington, DC. This David-versus-Goliath contest pits investors against the investment brokerage industry—and it’s not looking good for investors.

In the wake of the 2008 market crash and the ensuing financial crisis, lawmakers directed the Securities and Exchange Commission—Wall Street’s cop—to hold stock and insurance brokers to a tough investor protection standard. The brokerage and insurance industries went ballistic, launching an all-out effort to delay, water down, and otherwise smother the coming standard before it could breathe a breath of mature life.

How exactly would this frightful new standard impact Wall Street? It would force brokers to put clients’ interests first and it would likely make them liable if they profited unjustly at the cost of the average investor. That might seem like a good, commonsense idea to you and me. But Wall Street thinks very, very differently.

I want to be clear that many Wall Street brokers are truly concerned with doing the right thing for their clients. But as you’ll learn, even the good guys operate in an industry so riddled with conflicts of interest that the temptation to put profits before people exerts a powerful and constant pull. This tainted environment is enabled by the regulatory standard that the industry is fighting tooth and nail to protect, a mushy standard that allows brokers a ton of, to put it politely, ethical wiggle room. Replacing that standard, the industry fears, will hurt its profit margins. And on Wall Street, profit margins are not, repeat not, to be messed with. After all, Wall Street, too, has its own investors to serve.

The bad news for consumers is that right now, the brokerage industry appears to have the upper hand in its struggle with an SEC weakened by turnover and trapped in inertia.

For now, Wall Street—which is the first place consumers look when they need investment and financial advice—has those consumers right where it wants them. Make no mistake, much of the guidance that is so lucrative for brokers is demonstrably damaging to investors. Often, the investment product that’s not quite right for the client is oh-so-right for the broker because of the fat sales compensation that’s at stake.

And even when investors catch on to the fact that they’ve been wronged, they too often find little recourse. The typical investor unwittingly signs away his right to sue when he signs a brokerage contract. Instead, such investors are granted the ability to pursue arbitration through a potentially lengthy and expensive process that is controlled by FINRA, the brokerage industry’s self-regulator. Understandably, many investors don’t even bother.

I am writing this book because things don’t have to be this way. You, the consumer, have the power to stop it. And once you learn exactly how Wall Street operates—how your best interests are so often placed secondary to profits—I’m confident that you will send a message to the establishment by refusing to go along with the status quo. You, as an individual consumer, can help to tilt that status quo toward a new reality—a reality in which the needs of the consumer are placed first.

My goal, as the title says, is to wise you up. Part of my job in doing that is to pull back the veil on Wall Street (as well as non-Wall Street offenders who serve their needs before yours). After you read this book, you’ll understand just how conflicted the mainstream brokerage industry is. You’ll learn how the brokers, regulators, and lobbyists cooperate to enrich themselves and the industry at the consumers’ expense. And you’ll discover Wall Street’s chameleon personality—how brokers and the big firms they work for confuse and mislead consumers into believing they’re your allies.

But this isn’t just another salacious look at how Wall Street’s sausage is made. Most of that information is out there in one form or another. My mission in writing this book is also to provide information that can empower you. Simply stated, there are trustworthy financial advisors out there. It is possible to weed out conflicted advisors and find the ones that have the qualifications, the ethical standards, and the objectivity to serve as truly valuable allies.

At this point you may be asking yourself, "What does he have to gain from writing this book? What’s his angle?" I hope your skepticism is at least a little aroused—because consumers of investment and financial advice desperately need to be more skeptical. The answer is that, yes, I conceivably have something to gain in having you read this book. Inevitably, somebody may contact me because something in this small guide struck a cord with him or her.

In 1994 I founded what is now known as Convergent Wealth Advisors, an independent financial advisory firm based in Washington, DC and Los Angeles, and I have gone on to establish other financial service enterprises to serve investors of varied wealth. I started in this business more than two decades ago, driven to deliver institutional quality advice to individuals. It’s been my mission to be the opposite of the conflicted advisors that this book will expose. My goal is to always be the type of advisor that I will hold up for praise in this book. Independent of product sales, true advisors act as fiduciaries, and we’re fee-based rather than commission-based. As you read, you’ll learn what all that means and why it’s important. And, since I currently serve investors of varied size, there lies an inherent conflict in this book.

But here’s a bit of context. I’ve worked in the industry for 20 years and have already enjoyed all I could ask for in terms of success. I built a firm that advises on over $11 billion of assets for the kind of clients most advisors would frankly give their left arm for. Barron’s has ranked me the top independent advisor in the nation. I’ve benefited from all of the exposure and success that I could want. Trust me, I’m not hustling for your business, and if I were, there are definitely easier ways of doing that than writing a book.

The truth is that my goal is larger than my personal interests or those of my business. You see, the relationship between consumers and the brokerage industry truly bothers me. I see it as a form of social injustice. The cynical and damaging way that the industry treats individuals and families is just wrong, and after observing the industry up close for two decades, I know too much to keep quiet. That’s especially true because I know that consumers, like you, do have the ability to reclaim control of their financial futures.

At its core, this book is intended to empower you, the consumer. When you’ve finished it, you may decide to ditch your broker, or at least ask him or her some very tough questions. You may decide to seek out an advisor anew, determined to look past superficial traits and slick sales pitches for the substance that this book will teach you to understand and expect.

Or you may decide to forego using an advisor, and manage your investment portfolio yourself. As I explain in detail in Chapter 7, investing is not all that difficult if you follow a disciplined process.

Over the years, I have learned that regardless of the route that consumers choose to reach their financial goals, their success or failure often hinges on their own makeup as much as anything. With that in mind, I’ve devoted a significant chunk of the book to helping you understand the emotions and mental machinery that can trip you up in everything from investing your own money to choosing an advisor. It’s my hope and belief that understanding our internal workings as human beings can help us to make more rational, and ultimately wiser, decisions.

I flatter myself that many readers will find this book entertaining. Seeing how Wall Street works is, after all, a pretty juicy subject. But if the book does no more than feed cynicism about Wall Street, it will have failed. Because the takeaway should not be that we’re all screwed and that it’s impossible to find a good advisor. It should be the opposite: that even though Wall Street may see you as a sheep to be sheared, you’re not a sheep. You are a consumer—and as all salesmen know, the customer is always right.

Consumers have serious power. As individuals, they have the power to protect their interests by choosing wisely. As a group, they just may have the power to do what lawmakers and regulators seem unable to do: Through exercising the power of choice, and backing it with the power of their wallets, consumers can change the very way that the financial advisory industry operates.

Steven D. Lockshin

Chapter 1

Is This Any Way to Choose an Advisor?

Imagine that you’re on a hospital gurney, having just been wheeled into an operating room to undergo surgery to remove a brain tumor. You’re understandably anxious. Your surgeon appears and greets you. Everything about him inspires confidence, from his impeccable credentials to his confident demeanor, right down to his square jaw. He’s your man. Your surgeon seems to have come straight from central casting, and you experience a wave of comfort.

Just as the anesthesiologist adds a sedative to your IV, you notice something strange. Your surgeon’s scrubs are covered with patches of major company names—patches just like those that NASCAR drivers wear to promote their sponsor companies. Instead of the logos for Pennzoil or Walmart, though, your surgeon’s patches bear the logos of corporations in the medical field—device makers, pharmaceutical companies, even insurance companies.

. . . this surgery is brought to you by my sponsors . . .

Matt Corrado © 2013

The anesthesiologist just asked you to start counting backward from 10, but your mind is racing with unsettling questions: Is this surgeon focused on his sponsors or me? Will every choice that he makes during the next several hours be based purely on improving my odds of survival? Or is there a chance that he will choose one drug or device over another just because a certain pharmaceutical or device company cut a sponsorship deal with his practice? Might he use surgical instruments that are second-rate? Might he even cut corners to please the insurance company, lining his pockets in the process or in order to earn his right to attend the next Hawaiian boondoggle?

Then, just as you lose consciousness, you feel a flashing sense of betrayal: Why were you not told that your surgeon answers to corporate sponsors? He should answer to his patients only, and his focus should be on saving lives—period. He shouldn’t have even the slightest appearance or thought of a conflict of interest. And if those potential conflicts of interest do exist; they damned well shouldn’t be hidden until it’s too impractical to change surgeons.

Bad Financial Medicine

Luckily for all of us, this kind of scenario is pure fantasy. Sure, medicine has its flaws like every profession. But surgeons certainly aren’t known for putting their patients’ lives at risk for a few extra bucks.

If only the financial advice industry were the same. In survey after survey, Americans report that their financial health is their second highest priority, just behind the importance of their physical health. And yet the industry that Americans turn to for advice about how to manage their wealth, safeguard it, and pass it on to their loved ones is predominantly riddled with conflicts of interest.

In fact, I’d say that the financial advice industry has more built-in conflicts of interest than almost any other industry. I should know—I’ve been in the industry for more than 20 years and I founded one of the largest independent financial advice firms in the country, catering to some of the world’s wealthiest families. Based on my experience, I can assure you that a huge percentage of financial advisors live in a world where doing the right thing for the customer is usually not the most common course of action.

Sadly, most people have no idea that’s the case. If Americans knew how the industry works, they would be far more selective in choosing advisors. By the time you finish reading this book, you’ll understand just how conflicted the financial services industry is. You’ll also find out how you can bypass most, if not all, of the conflicted advisors and find the ones that work purely in your interests—and yes, they’re out there. You may even find out that managing your own investments is the best route for you.

Here’s a simple example of a pervasive conflict of interest in the financial advice industry. Let’s say your advisor is affiliated with one of the big, prestigious Wall Street firms. He’s decided that your investment portfolio should include a mutual fund that invests in international companies. He recommends a fund to you and explains the reasoning for the investment, and you give him the green light to buy shares of that fund for your account.

Perhaps what your advisor didn’t tell you is that the mutual fund he just recommended carries a higher sales fee than several other appropriate funds. The sales fee comes right out of your account and typically goes right into